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SU 13
Evidence- Other Assets, Liabilities, and Equities
102
Accounting
Undergraduate 4
06/01/2015

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Term
PPE audit
Definition
property, plant, and equipment
Term
account balances included in the PPE audit
Definition
Buildings, equipment, improvements, and vehicles including associated depreciation expense, repairs and maintenance, and accumulated depreciation.
Land
Capital leases and associated amortization expense
Term
completeness for PPE
Definition
Are all transactions affecting PPE for the period reflected in the balance?
Term
audit procedures for completeness for PPE
Definition
Perform analytical procedures.
Reconcile S/L and G/L.
Analyze repairs and maintenance.
Term
analytical procedures for completeness for PPE
Definition
ROA (NI / Avg. total assets)
plant assets / total assets
Term
Reconcile S/L and G/L
Definition
A schedule of fixed assets is typically prepared from the subsidiary records to be used in testing and is included in the audit documentation.
Term
analyze repairs and maintenance
Definition
auditor should vouch significant debits from the repairs and maintenance expense to see if any should have been capitalized (debits may have been for non-capital items).
Term
accuracy for PPE
Definition
Have the amounts for the specific accounts been recorded appropriately?
Term
audit procedures for accuracy for PPE
Definition
Include amounts and classifications in the management representation letter.
Term
valuation/allocation for PPE
Definition
Are balances of PPE recorded in accordance with GAAP (historical cost - accum. depr)?
Term
inspect records of purchases (assertions tested)
Definition
valuation/allocation
Term
vouch additions and disposals (assertions tested)
Definition
valuation/allocation, completeness, and existence.
Term
existence of PPE
Definition
Do the assets reflected in PPE exist as of the B/S date?
Term
audit procedures for existence of PPE
Definition
inspect plant additions (additions to PPE).
Term
inspect plant additions
Definition
The auditor vouches a sample from the recorded asset additions by examining the supporting documents and inspecting the physical assets. Testing in the opposite direction, i.e., by tracing from the supporting documentation to the G/L, does not provide evidence that recorded assets exist.
Initial audits require inspection of significant assets reflected in the beginning balance as well as additions.
Term
existence vs. completeness testing
Definition
existence- G/L to supporting documentation (journals to assets)
completeness- supporting documentation to G/L (assets to journals)
Term
cutoff for PPE
Definition
Have transactions relating to PPE been recorded in the proper period?
Term
testing cutoff for PPE
Definition
Additions and disposals near year end should be tested to ensure recording in the proper period.
Term
rights and obligations for PPE
Definition
Does the entity have ownership rights in the reported PPE?
Term
audit procedures for rights and obligations for PPE
Definition
Examine titles and leases.
Inspect insurance policies.
Inspect property tax records.
Term
examine titles and leases
Definition
Certain property should have certificates of title. For leased assets, contracts should allow the auditor to determine whether leases have been properly recorded as either capital or operating leases.
Term
inspect insurance policies
Definition
The entity should insure its assets. Vouching the recorded assets to insurance policies supports the rights assertion.
Term
liens
Definition
When liens are placed on equipment or property, the lienholder be named as the beneficiary. Hence, the policy is likely to be held by the lienholder even though the client is required to pay the premiums.
Term
occurrence of PPE
Definition
Did the transactions relating to PPE occur?
Term
audit procedures for occurrence of PPE
Definition
The auditor should test the authorization, execution, recording, and custody aspects of a sample of transactions.
Term
classification and understandability of PPE
Definition
Is the balance of PPE reflected on the B/S in the noncurrent section? Are adequate disclosures presented for methods of depreciation, commitments of assets, and capital lease terms?
Term
audit procedures for classification and understandability of PPE
Definition
Read F/S.
Make inquiries of management about disclosures and other reporting issues.
Significant items should be included in the management representation letter.
Term
balances included in audit plan for investments
Definition
noncurrent items- capital stock and bonds, equity and debt instruments
current items- trading, held-to-maturity, and available-for-sale securities
Derivatives and hedges
Revenues generated from investments.
Term
derivative
Definition
unperformed contract that results in cash flow between two counterparties based on (derived from) the change in some other indicator of value.
Term
hedge
Definition
defensive strategies to protect an entity against the risk of adverse price or interest rate movements on certain assets, liabilities, or anticipated transactions.
Term
On what does the appropriate classification of investments depend?
Definition
management's intent in purchasing and holding the investment, on the entity's actual investment activities, and, for certain debt securities, on the entity's ability to hold the investment to maturity.
Term
auditors and classifying investments
Definition
The auditor should obtain an understanding of the process used by management to classify investments before determining the nature, timing, and extent of further audit procedures.
Term
On what does the inherent risk of derivatives and securities depend?
Definition
their complexity, management's objectives, whether transactions involve a cash exchange, extent of entity's experience with derivatives and securities, whether a derivative is embedded in a host contract, external matters, entity's reliance of outsiders, assumptions required by GAAP.
Term
assessing control risk for investments
Definition
requires considering whether controls, including those of service organizations, have been implemented that provide for:
Independent approval and monitoring of derivatives activities,
Senior management's attention to situations in which limits are exceeded and divergences occur from approved derivatives strategies, and
Reconciliations over the full range of derivatives.
Term
substantive procedures based on investment risk assessments
Definition
The auditor should determine whether hedging activities have been carried out in accordance with GAAP.
The auditor also should gather evidence about management's intent and ability, for example, to hold debt securities until maturity, exercise significant influence over an equity-based investee, enter into a forecasted transaction, or dispose of securities classified as trading in the near term.
Furthermore, the auditor should obtain written management representations confirming various aspects of derivatives and securities transactions.
Term
completeness for investments
Definition
Are all transactions affecting investments for the period reflected in the balance?
Term
audit procedures for completeness for investments
Definition
Perform analytical procedures.
Reconcile S/L and control accounts.
Evaluate contracts and agreements.
Term
analytical procedures for completeness for investments
Definition
Prior-period amounts held should be compared with current amounts. The expected ROI held can be compared with actual recorded amounts.
Term
accuracy for investments
Definition
Have the amounts been recorded appropriately?
Term
audit procedures for accuracy for investments
Definition
Recalculate interest revenue.
Term
valuation/allocation for investments
Definition
Are balances valued in accordance w/GAAP?
Term
auditing procedures for valuation/allocation of investments
Definition
Vouch recorded amounts for trading securities and available-for-sale securities to market quotations if available. If not, obtain valuations from broker-dealers and other third-party sources.
Determine that unrealized gains and losses (changes in fair value) are properly accounted for.
Vouch recorded costs for HTM securities to market quotations. Measure at amortized cost only if going to be HTM.
Determine that transfers between categories of investments are at fair value.
Inspect relevant records and documents and make appropriate inquiries about nontemporary declines in fair value. They should be written down in this case.
Obtain audited F/S from the investees if investments are accounted for by the equity method.
Evaluate goodwill for potential impairments.
Term
unrealized gains and losses
Definition
changes in fair value
Term
Unrealized gains and losses on TS are included in...
Definition
earnings
Term
Unrealized gains and losses on AFS are included in...
Definition
OCI until realized.
Term
Are temporary declines in fair value written down?
Are nontemporary declines in fair value written down?
Definition
No.
Yes.
Term
existence of investments
Definition
Do the recorded investment balances exist at the B/S date?
Term
auditing procedures for existence of investments
Definition
Physically inspect and count securities in the client's possession.
Confirm securities.
Term
cutoff of investments
Definition
Have transactions been recorded in the proper period?
Term
rights and obligations of investments
Definition
Does the entity own the reported investments?
Term
auditing procedures for rights and obligations of investments
Definition
Trace dividend and interest revenue and ensure that it is properly recorded.
Term
occurrence of investments
Definition
Did the transactions related to investments occur?
Term
auditing procedures for occurrence of investments
Definition
Vouch recorded costs to documentation.
Term
classification and understandability of investments
Definition
Are balances related to investments reflected on the B/S in the current or noncurrent section depending on management expectations?
Term
auditing procedures for classification and understandability of investments
Definition
Inspect the F/S. Determine that individual trading, AFS, and HTM securities are reported as current and noncurrent as appropriate. Determine whether derivatives, hedges, and other financial instruments are adequately described in the F/S notes.
Make inquiries of management about intentions to dispose of investments.
Term
balances included in audit plan for noncurrent debt
Definition
Noncurrent notes payable, mortgages payable, and bonds payable
Related interest expense.
Term
completeness of noncurrent debt
Definition
Are all transactions affecting noncurrent debt for the period reflected in the balance?
Term
audit procedures for completeness of noncurrent debt
Definition
Perform analytical procedures.
Reconcile the S/L w/ control accounts in G/L.
Term
accuracy of noncurrent debt
Definition
Have the balances for specific accounts been recorded appropriately?
Term
audit procedures for accuracy of noncurrent debt
Definition
Make inquiries of management.
Term
valuation/allocation of noncurrent debt
Definition
Are balances valued in accordance with GAAP?
Term
audit procedures for valuation/allocation of noncurrent debt
Definition
Vouch recorded debt-to-debt instruments.
Test amortization.
Term
existence of noncurrent debt
Definition
Do the recorded noncurrent debt balances exist at the B/S date?
Term
audit procedures for existence of noncurrent debt
Definition
Physically inspect and count securities in the client's possession.
Confirm securities.
Term
cutoff of noncurrent debt
Definition
Have transactions been recorded in the proper period?
Term
rights and obligations of noncurrent debt
Definition
Has the entity incurred the reported debt?
Term
audit procedures for rights and obligations of noncurrent debt
Definition
Evaluate existing agreements. The auditor should obtain evidence that the debt is the obligation of the auditee.
Examine any bond trust indenture.
Term
occurrence of noncurrent debt
Definition
Did the transactions relating to noncurrent debt occur?
Term
audit procedures for occurrence of noncurrent debt
Definition
Review contracts and agreements.
Term
classification and understandability of noncurrent debt
Definition
Are balances properly reflected in the B/S, is interest expense properly reported on the I/S, and are adequate disclosures provided?
Term
audit procedures for classification and understandability of noncurrent debt
Definition
e B/S, is interest expense properly reported on the I/S, and are adequate disclosures provided?
Inspect the F/S. Determine that noncurrent and current debt are properly classified.
Inspect disclosures.
Term
balances included in equity audit plan
Definition
Common and preferred stock
Additional paid-in capital (APIC)
Retained earnings
Treasury stock
Accumulated other comprehensive income (OCI)
Term
completeness of equity
Definition
Are all transactions affecting equity for the period reflected in the balance?
Term
auditing procedures for completeness of equity
Definition
Perform analytical procedures. Prior-period amounts held should be compared with current amounts.
Reconcile the subsidiary ledger with the control accounts.
Term
accuracy of equity
Definition
Have the balances for specific accounts been recorded appropriately?

Auditing procedure: Make inquiries of management.
Term
valuation/allocation of equity
Definition
Are balances valued in accordance w/GAAP?
Term
auditing procedures for valuation/allocation of equity
Definition
Trace entries to equity accounts.
Test sales of treasury stock.
Term
existence of equity
Definition
Do the shares reported as outstanding or treasury stock exist at the B/S date?
Term
auditing procedures for existence of equity
Definition
Confirm shares issued and outstanding with the registrar and transfer agent.
Inspect stock certificates held in treasury.
Inspect stock certificate book.
Term
cutoff of equity
Definition
Have transactions been recorded in the proper period?
Term
rights and obligations of equity
Definition
Do equity balances reflect owners' interests?
Term
auditing procedures for rights and obligations of equity
Definition
Inspect the articles of incorporation and the bylaws of the corporation.
Term
occurrence of equity
Definition
Did the transactions relating to equity occur?

Vouch entries to supporting documents. (journals to assets)
Term
classification and understandability of equity
Definition
Are balances appropriately presented and are adequate disclosures provided?
Term
auditing procedures for classification and understandability of equity
Definition
Read minutes of BOD meetings.
Inspect disclosures about treasury stock.
Search for restrictions.
Term
balances included in payroll audit plan
Definition
Payroll expense
Inventories (for manufacturing firms)
Accrued payroll and vacation
Payroll tax liability
Pension costs and other post-employment benefit (OPEB) costs
Term
Payroll processing includes...
Definition
controls that have allowed the auditor to assess the RMM at a low level and thereby reduce the audit effort devoted to substantive testing. Most entities recognize that the benefits of controls exceed the costs related to the payroll processing system.
Term
key control in payroll dept.
Definition
separation of duties including a separate HR department. This control separates authorization from record keeping by the payroll department.
Term
completeness for payroll
Definition
Are all transactions affecting payroll reflected in the balances for the period?
Term
audit procedures for completeness for payroll
Definition
Are all transactions affecting payroll reflected in the balances for the period?
Reconcile payroll tax expense with payroll tax returns.
Term
analytical procedures (payroll completeness)
Definition
The auditor should compare current expense with expectations from prior periods and management-prepared budgets from the beginning of the period with actual results.
Term
accuracy for payroll
Definition
Have the balances for specific accounts been recorded appropriately?

Audit procedure: Make inquiries of management.
Term
valuation/allocation of payroll
Definition
Are balances valued in accordance w/GAAP?
Term
audit procedures for valuation/allocation of payroll
Definition
Trace costs to inventories (for manufacturing firms). The auditor should determine that they contain direct labor costs.
Recalculate pension and OPEB costs.
Term
existence for payroll
Definition
Do the accounts and balances exists as of the B/S date?
Term
audit procedures for existence for payroll
Definition
Observe the distribution of paychecks. A surprise observation of the distribution will provide assurance that only bona fide employees are being paid.
Term
cutoff for payroll
Definition
Have transactions been recorded in the proper period?

Procedure: Test payroll cutoff.
Term
rights and obligations for payroll
Definition
Are the assets (capitalized n inventory), expenses, and payables those of the entity?
Term
audit procedures for rights and obligations for payroll
Definition
Inspect canceled checks. These checks indicate payment to employees, government, and others relating to payroll.
Term
occurrence of payroll
Definition
Did the transactions relating to payroll occur?
Term
audit procedures for occurrence of payroll
Definition
Vouch a sample of employee transactions.
Term
classification and understandability for payroll
Definition
Are payroll costs properly reflected as an expense in the income statement? Are liabilities properly displayed as current or noncurrent on the B/S, and are the disclosures presented adequately?

Procedure: Read the F/S and disclosures.
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